22 March 2012

Tax cuts for the rich in a time of austerity

Following a week of extensive trailing and sometimes fraught public coalition negotiations, the Chancellor of the Exchequer announced the government’s 2012 Budget on Wednesday. The Budget made a wide range of changes to the tax regime but largely left spending plans untouched.

The most eye-catching part of the Budget was the move to cut the top rate of income tax from 50p to 45p from April 2013. The chancellor justified this decision by stating that rate had damaged British competitiveness and had raised only a third of the £1 billion originally expected. Even so, in the context of a deep, global recession, and at a time when many low income families are struggling with inflated costs and lower wages, it is difficult to see how the reduction will bring any economic benefit beyond a windfall to those earning over £150,000. All of which suggests that the move has more to do with politics than economics.

Another controversial move has been to pursue what is now being called a ‘granny tax’. This freezing of personal tax allowance for over-65s will affect 4.4 million existing pensioners who will lose £84 per year, and leave people who are set to retire next year £279 a year worse off. Raising £3.25 billion for the government over the next four years, it has been described by pensioner groups as a tax raid that targets people who have saved all their lives to increase their living standards. This might lead to a significant backlash among those most likely to turn out and vote at the next election.

Ahead of George Osborne’s speech and the publication of the noted red book containing all the policy announcements and detailed tables which set out how much each will cost or raise, the Conservative Party engaged in a very public wrangling with the Liberal Democrats over possible changes. The Liberal Democrats had made their plan to increase the starting point of tax to £10,000 a key point of their manifesto and secured it in the coalition agreement. Each Budget since the election has taken a step towards that level with a £1,100 increase coming next year.

The Liberal Democrats also wanted further measures to affect the wealthy, especially if the top rate of tax was reduced. First of all this was through a mansion tax, which put an annual charge on buildings valued over a certain level. Next came a tycoon tax which would set a minimum level of taxation millionaires would have to pay. In the end they got neither of these in exchange for the cut in the top rate. A new seven per cent rate of stamp duty is coming in for houses bought for over £2 million, and the expectation is that some form of a tycoon tax will follow in the coming years. How such a system would be enforced, aside from the closing to tax loopholes, more of which are addressed in this Budget, remains unclear.

Another significant change introduced in this Budget is the cut in corporation tax to 24 per cent, with it dropping to 22 per cent by 2014. The government will hope that this along with other measures help to spark a stronger period of growth and provide higher levels of employment. The latest projections published in the Budget suggest that the UK’s economy will grow this year, but only by 0.8 per cent. The government will also be hoping that inflation falls as predicted otherwise an increased cost of living could hurt many households. Because of lower than expected growth, and higher unemployment the national debt will continue to grow past the next election.

Following a wave of criticism over the proposed removal of child benefits from higher rate tax payers the Budget set out changes to their implementation. Instead of stopping as soon as parents pay higher rate tax they will now begin to be withdrawn from those earning over £50,000, disappearing altogether for incomes over £60,000. However, the changes make no amendments to the way it treats single and dual earner families. A family with two incomes each just under £50,000 will still receive child benefit while a family with one income of £60,000 will receive none. The Centre for Social Justice said: “It seems at least another year will pass before the coalition summons up the courage to take their marriage vows seriously.”

The Budget also places a cap at £50,000 or 25 per cent of earnings (whichever is higher) on the relief that can be claimed against tax. If enacted, this will affect those making large donations to charities. In details about how gift aid on small donations will be enacted it was announced that donations of up to £20 can be eligible for gift aid without a declaration. This will no doubt be welcomed by many churches and charities.

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